JPMorgan Chase & Co. ([stock]JPM[/stock]) is scheduled to report its first quarter 2011 results before the market opens on Wednesday, April 13, 2011. The Zacks Consensus Estimate for the quarter is $ 1.16 per share, representing a growth of about 57% over the year-ago quarter.
Going by past records, it is expected that JPMorgan will again surpass estimates. Improvement in equity markets, reduction in reserves for future losses and superior commercial loan activity are the likely factors to drive the results.
However, weak trading and investment banking performances might mar the results to some extent. Also, there are concerns related to slothful customer trading in fixed income, currencies and commodities. Furthermore, we expect a slight dent related to litigation expenses.
Previous Quarter Performance
JPMorgan’s fourth quarter earnings came in at $ 1.12 per share, substantially ahead of the Zacks Consensus Estimate of $ 1.00. Results also soared from earnings of 74 cents in the prior-year quarter.
The better-than-expected numbers were primarily supported by higher non-interest revenue and a slowdown in provision for credit losses, which more than offset a rise in non-interest expense primarily resulting from increased litigation reserves.
Managed net revenue for the quarter came in at $ 26.7 billion, up 6% from $ 25.2 billion in the year-ago quarter. This also compared favorably with the Zacks Consensus Estimate of $ 24.2 billion.
Earnings Estimate Revisions – Overview
Ahead of the earnings release, Zacks Consensus Estimate for the to-be quarter dropped marginally while annual estimates moved up. The estimate revision trends and the magnitude of such revisions justify the steadiness of the stock.
We will now go through the details of earnings estimate revisions to substantiate why investors should be neutral to this stock.
Agreement of Estimate Revisions
Looking at the estimate revision trends, it becomes clear that a majority of the analysts are in agreement with the lower first quarter earnings outlook for JPMorgan. Of the 22 analysts covering the stock, 3 have lowered their estimates for the first quarter, while only one moved in the opposite direction over the last 7 days.
For FY2011, there were 4 downward estimate revisions, while 3 moved north. However, for FY2012, 2 analysts have increased their estimates, with one moving downward over the last 7 days.
Magnitude of Estimate Revisions
The Zacks Consensus Estimate for the first quarter marginally decreased to operating earnings of $ 1.16 per share from $ 1.17 over the last 7 days. However, estimates for FY2011 moved up slightly from earnings per share of $ 4.77 to $ 4.78. For FY2012, estimates also moved up by 2 cents to $ 5.64 per share.
The magnitude of estimate revisions explains why investors should be neutral on JPMorgan in the short run. However, adding the stock to an investor’s portfolio for the long haul will be a good decision at this point.
Earnings Surprise
JPMorgan’s performance has been stable over the trailing four quarters with respect to earnings surprises. The average earnings surprise was a positive 23%. This implies that the company has beaten the Zacks Consensus Estimate by the same magnitude over the last four quarters.
JPMorgan is Still a Steady Stock
JPMorgan is now a good stock for value investors considering its enhanced dividend-yielding nature.
Last month, the Federal Reserve released the much-awaited second round of stress test results, giving many big banks including JPMorgan the green signal for immediate actions on raising dividends.
JPMorgan’s dividend hike and share buy back actions were prohibited in the last few years on fears that it may not have sufficient capital to tide over another financial crisis.
Finally, JPMorgan increased its quarterly cash dividend to 25 cents per share. This dividend is payable on April 30, 2011 to shareholders of record at the close of business on April 6. Hence, the annual dividend payable to shareholders comes to $ 1 per share. The new and improved dividend marks a five-fold increase from the prior annual dividend of 20 cents per share.
Moreover, if an investor has the appetite to absorb risks related to market volatility, investment in JPMorgan will not disappoint. Though the stock is not trading for less than it is worth, JPMorgan’s fundamentals remain very promising.
Most importantly, despite the macro pressure on credit quality, JPMorgan’s credit metrics have been steadily improving since the last quarter of 2009. We are impressed to see improved delinquency trends across almost all consumer lending areas such as home equity, mortgage and credit card. We expect the trend of improving credit quality to continue, providing room for earnings growth.
However, sluggish lending activity remains the major concern for JPMorgan at this point. As net interest margin (NIM) continues to remain under pressure, its traditional banking businesses may face challenges. Also, with the new banking regulations, there will be pressure on fees and loan growth is expected to remain feeble. We expect NIM to remain depressed at least though the first half of 2011.
Conclusion
The estimate revision trends and magnitude of revision do not reflect any clear directional pressure on the shares over the near term.
JPMorgan shares are maintaining a Zacks #3 Rank, which translates into a short-term ‘Hold’ rating. Also, considering the company’s business model and fundamentals, we have a long-term Neutral recommendation on the stock.
As JPMorgan is a banking giant with exposure to almost all major banking businesses and since it is the first among the big U.S. banks to report, its results are going to be a significant indicator of performance of other important banks during the quarter.
Close on the heels of JPMorgan, among other major banks, Bank of America Corporation ([stock]MS[/stock]) on April 21.
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